Strategy Number 6 – Short Futures Contract

Expectation of a decrease in DJ Index. This is an alternative to selling shares.

Strategy components

Writing a Short Call option at a strike price equal to the DJ Index.

Purchasing a Long Put option at a strike price equal to the DJ Index.

Example: Purchase a Long Put 100 at a price of $1,000 and write a Short Call 100 option, for which we receive $1,000. The strategy is known as a Short “Futures Contract” since this combination creates an obligation (contract) to sell the DJ Index at the exercise date at its current price (100 points – $10,000).

Expenses / Income from building the strategy (at start date)

In the following example we have assumed that the prices of the options are identical. in other words, the cost of the strategy is $0.

Auxiliary table for building the profit line

DJ Index(Horizontal axis)

(Fixed expenses)/ fixed income

Variable expenses(Call contribution)

Variable income (Put contribution)

Total profit / (loss) (Vertical axis)2+3+4

1

2

3

4

5

50

$0

—

$5,000

$5,000

60

$0

—

$4,000

$4,000

70

$0

—

$3,000

$3,000

80

$0

—

$2,000

$2,000

90

$0

—

$1,000

$1,000

100

$0

—

—

$0

110

$0

($1,000)

—

($1,000)

120

$0

($2,000)

—

($2,000)

130

$0

($3,000)

—

($3,000)

140

$0

($4,000)

—

($4,000)

150

$0

($5,000)

—

($5,000)

Strategy analysis:

Source of profit

When the index goes up, the profit arises from the Put option.

Source of loss

When the index goes down, the loss from the writing of the Short Call.

Break-even point

When there are no losses from the Call option and no profits from the Put option. This occurs at index 100.

Comment

The following explanation is for those of you who are familiar with the term “Short” (“Selling Short”). This strategy is the same as shorting on the DJ Index.

That is:

At any level of the index our profit (or loss) from the strategy will be equal to the profit (loss) from selling the DJ Index basket (the “basket”) of shares short.

Example:

Let us assume that the DJ Index at the end of the period stands at 150 points. For selling the “basket” at the start date (when the index stood at 100 points) we receive $10,000 (100 points X $100). For purchasing the “basket” at index 150 points, we would pay $15,000, and make a loss totaling $5,000. This is the exact amount appearing in column 5 of the auxiliary table, next to 150 points in column 1.